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Mortgage cramdown faces critical test

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Chris Dodd has given housing advocates two weeks to find a compromise that would win 60 votes for a long-stalled proposal to allow bankruptcy judges to restructure mortgages.
Reuters

It’s cram time for cramdown proponents.

Senate Banking Committee Chairman Chris Dodd (D-Conn.) has given housing advocates two weeks to find a compromise that would win 60 votes for a long-stalled proposal to allow bankruptcy judges to restructure mortgages. Critics of this proposal call it a cramdown because it would force mortgage lenders to reduce principal and interest rates in some bankruptcy cases.

“So we get back here [after a two-week spring break], we’re either there or we’re not there,” Dodd said. “We have to move along on these things.”

When asked if that meant he was willing to drop the bankruptcy provision, Dodd hedged. “Well, I’m not saying that,” he said. “I’m going to think optimistically.”

But Dodd’s comments echo a March 27 statement by Senate Majority Leader Harry Reid (D-Nev.) that he would strip the bankruptcy provision from a major housing bill if the votes don’t materialize.

That puts a lot of pressure on the bankruptcy provision’s top Senate supporters, Majority Whip Richard J. Durbin (D-Ill.) and Charles Schumer (D-N.Y.), who will have to use the congressional recess to rally reluctant colleagues to back the controversial mortgage proposal.

Durbin has waged a long campaign to win passage of the bankruptcy measure, which he believes would help prevent foreclosures. Opponents warn it would raise mortgage rates for all borrowers if mortgage lenders are forced to take on the cost of reducing principal and interest rates in some bankruptcy cases.

Key Senate offices, mortgage lenders and industry groups are negotiating this week and next week to figure out if there is any room for compromise.

Sen. Evan Bayh (D-Ind.) has been among the moderate Democrats seeking to narrow the bankruptcy language. There has also been a rotating group of Republicans engaged on the issue, including Sen. Arlen Specter of Pennsylvania.

The American Bankers Association, the Credit Union National Association and the Independent Community Bankers of America are involved in the talks, representing the banking and mortgage industries. The Center for Responsible Lending, a consumer advocacy group that backs the proposal, has also been intimately involved in the negotiations.

Republican and industry critics view the drawn-out negotiations as evidence that Democratic supporters don’t have the votes. The House passed a broad bankruptcy provision that even moderate Democrats consider too generous in terms of who could access bankruptcy for foreclosure relief. At the other end of the spectrum is a proposal to limit the bankruptcy option to subprime mortgages only, a non-starter for Durbin and Schumer.

Democratic negotiators hope there’s middle ground between these two ideas.

“Those are the two bookends; we’re trying to find the sweet spot in the middle,” a Democratic aide familiar with the talks said, adding that there is a “good chance” they will have a bill ready for floor action by the conclusion of recess.

But the negotiations are clearly sensitive, with outside participants saying they’ve been more or less sworn to secrecy over the substance of the discussions.

One source close to the negotiations interpreted Reid’s statements about dropping bankruptcy from the broader housing measure as an attempt to increase the pressure on the proposal’s most ardent supporters to start compromising.

“I would disagree with the notion that the issue is dead,” the source added, suggesting Reid’s warning had the desired effect.

The financial services lobbyists at the table have their own motivations for making a good faith attempt to craft a bill they can swallow. The economic slowdown has left the industry hurting and the Senate in a position to help craft a broad housing bill that may help the industry while downsizing the impact of any cramdown provision. That’s opened at least some minds in the industry, after fighting the bankruptcy change tooth and nail for more than a year.

One provision that banks like in the Senate bill is a proposal to increase the Federal Deposit Insurance Corp.’s borrowing authority in order to avoid the FDIC charging higher fees. The fix was included in the housing bill in the House — along with the more controversial bankruptcy proposal.

Readers' Comments (7)

This mortgage cramdown is another attempt to help people who acted irresponsibly and will cost all borrowers in the future. Individuals who file bankruptcy will get their principal and interest reduced, while those of us who pay our mortgage are still paying the full principal.

This issue has been terribly mischaracterized. It isn't about whether we should aid homeowners who may not deserve the help, nor is it about forcing lenders to take losses on mortgages. It’s about whether it makes sense to apply the same type of bankruptcy principles to mortgage debt that we apply to business bankruptcies.all

This issue has been terribly mischaracterized. It isn't about whether we should aid homeowners who may not deserve the help, nor is it about forcing lenders to take losses on mortgages. It’s about whether it makes sense to apply the same type of bankruptcy principles to mortgage debt that we apply to business bankruptcies.all

The Mortgage "cramdown", as it is being called, sounds like a good fast solution to the housing crisis that can be solved by allowing the judges to do their jobs in a humane manner. It lets the banks off the hook by all the analysis and calculations for them.

It is hard to imagine how bankers who want to solve the problem of falling real estate values and a major glut of empty abandoned houses on the market could object to a solution that requires no effort on their part. All they have to do is pass the lower interst rates on to the customers like they are supposed to do. GM should be so lucky as to have that option.

Don't forget to follow the money when the time comes for the vote in Congress. Watch who votes for the "cramdown" and who votes against it. Then see who their friends are. Those bankers may be the ones to avoid dealing with.

There is a website with some interesting refinancing proposals that would enable many more refinancings of underwater mortgages at affordable payment rates while also significantly minimizing potential losses for lenders. The proposal provides three potential options for home owners depending on their level of commitment to their homes and may be seen here: http://www.whatobamashouldbedo...

There is also a lot of other stuff in the proposal but the mortgage refinancing ideas are near the beginning.

Leave it to the weasel Dodd to pull any provision that benefits the people and ires his real constituency, big business and corporations. Why doesn't someone ask him why he is still sitting on the legislation that would give some relief to the credit card holders who are being robbed blind and strangled to death by the greedy credit card companies. Of course he is responsible for removing language that would have prevented CEO's from collecting multi million dollar bonuses. I am a staunch Democrat but I think when someone who purports to represent the people is this much of a worm, serves himself instead of the people who elected him, lines his own pockets and bank accounts at the expense of the poor working people...well, all I can say is I hope the good people of Connecticut will wake up and smell the coffee and put this old phony out of business before he rips them off anymore. Let him go somewhere and work for his money for a change.